Rogers commits to full divestiture of Freedom amid scrutiny on Shaw deal

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Rogers Communications Inc. is getting more specific about its plans to unload Shaw Communications Inc.’s Freedom Mobile wireless operations, committing publicly for the first time to divesting the wireless division in its entirety in the wake of a challenge to the telcos’ $26-billion combination from Canada’s competition watchdog.

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“The Competition Bureau has stated that there must be a continuation of a vibrant and competitive wireless market. We agree, and to that end, we are engaged in a process to divest Shaw’s Freedom Wireless business in its entirety,” Rogers said in a statement Monday evening.

It was widely expected that Rogers would have to sell at least some if not most of the wireless assets, which include spectrum licences, after François-Philippe Champagne, the federal minister of innovation, science and industry, said in March that “the wholesale transfer of Shaw’s wireless licences to Rogers is fundamentally incompatible with our government’s policies for spectrum and mobile service competition.”

Champagne’s use of the word “wholesale,” however, had sparked speculation among analysts that authorities might be satisfied with a transaction that allowed Rogers to keep some portion of the assets.

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News reports in recent weeks suggested Rogers had a proposal to sell Freedom Mobile to New Brunswick-based rural internet service provider and mobile network operator Xplornet Communications Inc., which it hoped would win government approval. The Aquilini family, owner of the Vancouver Canucks, was also named as a suitor that emerged from the pack. Rogers has neither confirmed nor denied those reports, nor have the terms of any potential deal been disclosed.

While there has been no indication either bidder was rejected, National Bank analyst Adam Shine said in a note to clients Sunday that “something might not have been perfect about either one.”

The structure or terms of those deals might be an issue, Shine speculated, adding that it’s also possible “a fuller and more open auction process would have captured more interested parties and proven more palatable to the regulator.”

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Other analysts have speculated that the competition authority’s move will lead to a lower price or better terms for any buyer, including possible network-sharing arrangements with Rogers following the sale.

The Toronto-based telco is now busy on multiple fronts: selling Freedom Mobile, negotiating with the Competition Bureau and preparing a formal response to the objections.

The stock price of both Shaw and Rogers slid Monday, before paring some of those losses Tuesday, after the Competition Bureau spelled out complaints it has filed with the Competition Tribunal, alleging among other things that competition between the two rivals eased after the merger was announced and, if it is allowed to proceed, harm will “continue and may worsen.”

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The Commissioner of Competition warned the companies late last week that it would oppose their merger. The formal complaint Monday came after Rogers and Shaw issued a joint statement indicating that they had offered to address concerns regarding the possible impact on Canada’s competitive wireless market by proposing the full divestiture of Shaw’s wireless business — Rogers’ first mention of selling Freedom Mobile in its entirety. The statement added that a process to sell Freedom was already underway to address concerns raised by the competition commissioner and Innovation, Science and Economic Development Canada.

The merger of Rogers and Shaw was slated to close next month, but that has been pushed out until the end of July and could be moved again, depending on how talks and the sale of Freedom progress.

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Jerome Dubreuil, a telecom and media analyst at Desjardins, said in a note to clients last Monday that there was some relief that competition authorities don’t seem to have a problem with Rogers and Shaw combining their substantial, though not overlapping, cable operations. He noted that concerns over cable “would be more difficult to address while keeping the deal worthwhile” for Rogers.

The analyst also considered it important that competition authority did not mention a “remedy package” presented by Rogers, which would have included plans for Freedom Mobile.

“This was surprising to us, and it would therefore appear that the CB (Competition Bureau) is opposed to the transaction in its original form, rather than to the transaction including the remedy package,” Dubreuil wrote, adding that concern over the loss of a competitor in the market would be eliminated if Freedom is sold to another party.

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“Our initial view is that the divestiture of Freedom would alleviate the CB’s concerns as presented today.”

The analyst said if this is the case, the bureau’s position would be harder to defend before the courts if Freedom Mobile is sold.

He added that there appears to be less reason to believe, as some observers have suggested, that the Competition Bureau’s problem lies with Rogers’ choice of buyer for Shaw’s Freedom Mobile assets.

Suitors are understood to include Xplornet, which is owned by private equity firm Stonepeak Infrastructure Partners, Aquilini Investment Group, and Montreal-based Quebecor Inc.

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In addition, Anthony Lacavera, founder of Wind Mobile whose assets were ultimately sold to Shaw and renamed Freedom Mobile, has been public about his interest in re-acquiring the wireless operations alongside financial backers, and Cogeco Inc. is considered by some analysts to be another possible option.

Based on Shaw’s share price, Dubreuil said the market is pricing in a 60 to 65 per cent probability that the merger will ultimately be approved.

The merger has been approved by Shaw shareholders and the Canadian Radio-television and Telecommunications Commission, but is contingent on further approvals from the Competition Bureau and the Innovation, Science and Economic Development Canada (ISED).

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